In an incredible announcement, AT&T declared that it will be raising its termination fee for iPhones and a few other devices from $175 to $325. The company offers some explanatory chatter about handset subsidies, but the real message it’s sending is that it’s simply done trying to win over customers. Rather than keeping us the old fashioned way, by creating and sustaining real value, AT&T is now just charging us a ransom to leave. Imagine an AT&T that was truly confident in its ability to serve? How would it behave in the marketplace? It would invite customers to stay only as long as we’re satisfied — and not a cell-phone minute longer.

I find this decision scandalous, particularly since I’m already a frustrated AT&T customer (I can barely make it through a phone call without it being dropped). When a company moves towards trapping customers, the clock starts ticking on its ability to serve them. Penalties for ending the relationship create sharp antagonism with customers — antagonism that’s disproportionately felt by front-line workers — and signals to the entire organization to forget about excellence.

This toxic combination ensures mediocrity and accelerates a company’s decline. I get it. Winning the cell phone game is hard, and the people behind the idea likely had the best interests of the company in mind. But when you broadcast that you can’t convince customers to voluntarily stick around, everyone hears you loud and clear, including your employees. Who would keep trying in a culture like this?

I was intrigued by a recent NYT interview with Omar Hamoui, founder and chief executive of the mobile advertising network AdMob. Hamoui argued that organizational insecurity led to deep resistance to discussing problems:

When people are insecure, they just tend to hide and bury [problems]. The bad news eventually comes out, but it comes out all at once, and in sort of catastrophic form. I’m just much more in favor of conveying all the bad news in real time.

He continues:

If everybody at the company can feel that they’re not putting their jobs in peril by relaying those kinds of things, then you really do get a pretty accurate picture.

This manifests in a distinct culture at AdMob:

…we spend a great amount of time talking about everything that’s wrong. Not because we’re trying to be negative. You can only talk for so long about what’s going well and have it be useful. You can be a lot more productive if you spend time on the things that aren’t going well.

But this is atypical in most organizations, and so when others join the conversation, they need to be trained:

When we would have visitors come to our board meetings, I would have to spend time prepping them ahead of time, basically telling them: “Don’t worry. The company’s not falling apart. Everything’s going fine. This is just how we are.”

I often discuss the need to surface problems (here’s an earlier post on the subject), and whenever I do people get nervous about creating a culture of “whiners.” They worry that if people are encouraged to bring up problems, particularly if they’re not on the hook for the solutions, then discussions will be reduced to toxic complaining about the other guy. Hamoui has found just the opposite:

… nobody at AdMob is shy to point out a problem or an issue with a product or service, even if it’s a product or service that they didn’t build or they don’t own or doesn’t fall within their domain. People aren’t shy about bringing up these issues and being fairly demanding that we solve them. I think that that’s led to us being very proactive.

Every company has problems. Surfacing those problems and addressing them quickly is the sign of a healthy, secure organization. It’s also the sign of an effective leader. As Hamoui demonstrates, spinning reality and covering up the truth may be the more costly and dangerous path.

The first time I heard the concept of “fewer, better people” was in an executive education session taught by my colleague and mentor Earl Sasser several years ago. I have been captivated by the idea ever since, the idea of building an organization that cultivates and rewards excellence in its employees — and makes it sustainable by minimizing the size of the team. I have rarely seen the fewer/better HR strategy in practice, however. In a recent NYT interview, Kip Tindall, CEO of the Container Store described his version of it:

…one great person could easily be as productive as three good people. One great is equal to three good. If you really believe that, a lot of things happen. We try to pay 50 to 100 percent above industry average. That’s good for the employee, and that’s good for the customer, but it’s good for the company, too, because you get three times the productivity at only two times the labor cost.

A significant obstacle to enacting this strategy is that you need a great deal of confidence in your ability to tell the difference between good and great employees. And then you need the discipline to say no to the good ones, which can be particularly difficult in a growth context. But the merely good can destroy a culture of great. Finally, you need to design an environment where great people can work effectively.

None of these steps is easy. Take the average fast food restaurant as an example. Now try to redesign the restaurant to require a third of the people, each making twice the current wage. The current selection and training processes would have to be scratched. Jobs and incentives would have to be thoughtfully reconsidered. Where to begin? Start with this workforce in mind, and pull out a clean sheet of paper. How could their work be done differently?

The answers aren’t obvious, but what’s the potential payoff? Employees, customers and owners who all love interacting with your business.

A recent NYT article touched on the issue of charging airline passengers fees for small components of the service experience. How close are we to the world that a Southwest commercial famously parodied, where customers have to scrounge for quarters to open up the overhead bins? Not far, it seems. Airlines have an emotional hurdle to charging extra for carry-on bags, but virtually everything else is fair game.

The economics of this decision are understandable. Airlines have been losing money on ticket prices, claiming that the prices the market will bear are not enough to cover their unyielding costs. The revenue they get from fees drops almost directly to the bottom line. Fees translate into “pure profit” because there is very little incremental cost in, say, sitting in an aisle seat.

But as airlines chase each other down the fees rabbit hole, customer goodwill is likely to follow. Customers hate being nickled and dimed in-flight, particularly those who fly regularly. So why do so many airlines think they’ll prevail by giving their best customers a reason to hate them? It feels like an entire industry is throwing in the towel.

The game is over when service executives assume that customers don’t value the difference between good and bad service. When this happens, whole industries can get stuck in a competitive death spiral where they try to get a larger and larger piece of a fixed pie they share with their customers. This is happening with airlines today, but it doesn’t have to be this way. Competing on service can increase the size of the pie and make everyone better off (customers, employees and owners), even in low-margin businesses.

Why is it so difficult to make this leap? Because differentiating, by definition, requires doing things differently. Managers with things to lose (a career in a conservative culture) have powerful incentives to keep doing the same things only harder, to run faster than their competitors rather than create a whole new game.

Most airlines are not just running the same, tired race — they’re now asking their customers and employees to do the running for them. That’s what the proliferation of fees represents. Rather than delivering an exceptional experience or innovating on costs, airlines are designing elaborate schemes to charge customers extra without giving them anything in return. And then they’re throwing their frontline employees out there to deal with customers’ angry response. My advice is to reroute the creativity from fee schemes to service. We’re getting close to the point where most airlines have nothing to lose from trying.

I had an unfortunate service experience recently involving Boston Coach, or more specifically, a Boston Coach affiliate. Boston Coach is a car service known for its national network of premium taxi services. I get tremendous value out of the service when I travel for work, as I often end up in unfamiliar cities at unfortunate hours. Knowing that there’s someone responsible for me on the other end, someone who’s accountable for my safety and knows exactly where I’m going, reduces my anxiety (and my family’s) in dramatic ways.

But things can go wrong, as they can in any service, and as they did for me with a recent Boston Coach airport pick-up. As I stood waiting for my driver, watching the clock tick by and watching every other traveler trickle out of the building, I had plenty of time to reflect on the service failure. The question I asked myself was whether this was bad design or bad execution, was the employee delivering ineffectively on a good service model or was the model itself broken? By the end of the encounter, more than an hour later, I concluded that it was service failure by design. This is usually the answer.

Boston Coach has trained me to expect a driver holding a sign with my name on it when I arrive at the location they designate (typically baggage claim or a specified waiting area for car services). When I arrived exhausted in the Corpus Christi airport, there was no sign of a driver. I called the company, who put me on hold for ten minutes as they tried to track down the affiliate. Another thirty minutes later someone pulled up, unconcerned about my experience and defensive about my frustration, which made the subsequent ride painful. It turns out the driver had followed her company’s instructions to the letter, and the fact that those policies delayed, agitated and disoriented me was not her problem. I don’t blame the driver for the poor service. She was clearly motivated by doing her job right, but somehow her managers had made it clear that she serves the company before its customers.

This is a choice that all service organizations must make. Who is first on your employees’ list of priorities? You or you customers? In the absence of a clear choice, most employees will put the company first. It’s just human nature. The company signs their checks every month and doles out status and other rewards most directly. An exception is models such as high-end restaurant or concierge services where customers pay a large percentage of employees’ compensation.

If you’re not running a five-star restaurant and you really want your team to put customers first (not every company does or should), then it requires very deliberate operational choice-making and alignment. This includes creating a culture of service that puts customers at the center of organizational life. If service excellence is part of your strategy, then your employees must observe no meaningful difference between doing their job right and serving customers well. And they must have the tools to deliver on that observation. Your average employee must have the training, support, flexibility and incentives to deliver an outstanding service experience.

If you’ve designed a model like that and are still delivering bad service, then go ahead, blame your people. But they’re typically the last place I look when diagnosing service failures. Most employees are like my driver in Corpus Christi, earnestly doing the right thing and making your customers miserable along the way.

POSTSCRIPT:

Below is the correspondence I received after the incident from Boston Coach headquarters. In another post I’ll discuss what we’ve learned about responding to customer complaints. For now, here is an illustration of what not to do:

I apologize for this inconvenience. I would like to offer you a voucher which would be good for $50 off of your next trip with BostonCoach. Please let me know if this is acceptable and I will email you the voucher as soon as possible.

In a recent NYT interview Tony Hsieh (pronounced “shay”), CEO of Zappos, described his management priorities in this order: culture first, service second. This may come as a surprise to anyone who has first-hand experience with the Zappos service model, which consistently produces excellence at virtually every customer touch point. I myself was surprised. I’ve heard many executives talk about the need to align culture with service, but I’ve rarely heard someone describe culture as their organization’s primary purpose.

When pushed to explain what got him there, Hsieh reflected poignantly on a prior company he built and sold (for a great deal of money) that had a culture he and others hated. He vowed never to let it happen again:

When it was starting out, when it was just 5 or 10 of us, it was like your typical dot-com. We were all really excited, working around the clock, sleeping under our desks, had no idea what day of the week it was. But we didn’t know any better and didn’t pay attention to company culture.

By the time we got to 100 people, even though we hired people with the right skill sets and experiences, I just dreaded getting out of bed in the morning…when I joined Zappos about a year later, I wanted to make sure that I didn’t make the same mistake…in terms of the company culture going downhill. So for us, at Zappos, we really view culture as our No. 1 priority. We decided that if we get the culture right, most of the stuff, like building a brand around delivering the very best customer service, will just take care of itself.

How do you “get the culture right?” In Hsieh’s case, he and his team decided to live and die by a series of core values:

…we formalized the definition of our culture into 10 core values. We wanted to come up with committable core values, meaning that we would actually be willing to hire and fire people based on those values, regardless of their individual job performance. Given that criteria, it’s actually pretty tough to come up with core values.

I was particularly moved by his take on his own role in designing and protecting the Zappos culture, which involved a central responsibility to create an environment where other people will thrive:

Maybe an analogy is, if you think of the employees and culture as plants growing, I’m not trying to be the biggest plant for them to aspire to. I’m more trying to architect the greenhouse where they can all flourish and grow.

So what happens to the greenhouse once Amazon buys it? I wrestled with this question when I wrote about Zappos culture in a post last year, as I was getting ready to go on a case visit. We wrote the case just as the Amazon purchase was going through (for just under a billion dollars).

Amazon has clearly indicated its respect for Zappos culture and its desire to leave the company alone to continue to deliver wold-class service. My hope is that Amazon can resist the temptation that has tripped up so many other acquirers, the temptation to provide a bit too much help the moment the acquired misses its numbers, a tweak here, a tweak there, to improve its performance. That kind of help can be a lethal blow to the true drivers of a company’s value. In the case of Zappos, I’m not convinced its culture could survive this well-intentioned support.

The title is from the opening pages of the Cleveland Clinic’s Annual Report, which quotes Dr. Rene Favaloro: “the patient is not only an illness, he has a soul.” I came across the quote as I watched my colleague, Ananth Raman, teach a class in our Achieving Breakthrough Service executive education program at HBS. Ananth took the class through an incredible discussion of why a healthcare provider would need to remind employees that a patient has a soul. His larger point was that we can get so lost in the quest for operational excellence that we lose sight of the humanity of the people we’re serving.

Ananth titled his talk “Empathy and Execution.” One of the reasons it resonated so deeply with me is that it intersects with what I’ve been stressing in my work with executives, which is the need to set high standards for their people, but to do so with high empathy. Getting one right with out the other is much easier than getting both right, as I explored in a previous post.

Ananth convinced me that this frame is important for customers, too. In fact, I’m increasingly persuaded that one of the secrets to healthy organizations is a culture of compassion and excellence around all human interactions. These values benefit everyone in the system — managers, staff, suppliers, investors and, yes, customers. I’m finding they work for my toddler, too.